New SEC Proposals May Make Private Fund Raising Easier for Small Wineries

March 28, 2014 – ArticlesBy Philip L. Hinerman

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There is always a lot of interest in ways smaller businesses can use reduced regulatory requirements to raise new money. We have seen clients raise funds needed to enlarge tasting rooms, hire marketing staff, obtain new grape sources and vineyards and open new market possibilities. Yet more regulatory hurdles may be removed in recent proposals from the regulators.

The easing of regulations helps create more flexibility in getting funds to new businesses. In the past, regulations and red tape scared off small companies from offering a stock interest in a business in exchange for capital to expand the business. The main alternative for funding was to avoid the red tape of a formal stock offering to investors. It was far easier and cheaper to get traditional lending from financial institutions than it was to get investor funds for stock in the company. After all, if you get a loan, you did not have to deal with Securities and Exchange Commission (SEC) regulations on new offerings.

The Jumpstart Our Business Startups Act of 2012 (JOBS) was designed to make it much easier to get private capital. The act required revisions to a number of SEC regulations. Earlier, we had discussed changes made in Regulation D by the SEC. Now, changes are proposed to the lesser used SEC Regulation A. JOBS required that the SEC develop rules for lesser used Regulation A, expanding the amount of money you can raise from $5 million to $50 million.

These rules have been subject to public comment. Portions of the proposed rules are likely to make it easier and cheaper for companies to use private placement memorandum to raise funds. Fund raisers would still be required to file offering statements with the SEC but the financial information required will be simpler and cheaper to prepare. Importantly, the draft rules would allow small companies the opportunity to “test the waters” with draft offering statements submitted to the SEC and not open for public review. These materials can be run by the potential investors before filing with the SEC. Also, there would be reduced and electronic filing of materials with the SEC.

The rules are a bit controversial in that they limit the roles of state regulatory agencies. The SEC is reviewing a number of comments. As always, we will keep up with developments. You should always consult with counsel regarding the various ways to enhance financing.